Union Budget 2010 – Nothing but a mirage for tax payer

The Union Budget 2010 surprised many as they expected it to be a harsh one. There were lot of benefits announced which are supposed to be aimed at increasing the consumer spending so as to revive the sagging GDP growth rate.

The inflation which had dipped to sub zero levels has again gone up to higher levels due to the stimulus exercise taken by the government few months back. Any monetary measure to curb inflation would affect the domestic demand. Therefore it seems that the government wanted to give more money in the hands of people so that they can spend more even at increased price levels. Let us see if the tax proposals in the budget will really help the government to achieve its goal.

Personal Income Tax Proposals

One of the highlights is the raise in exemption limit in personal income tax and also changes in income slabs. Exemption limit in personal income tax raised by Rs.15,000 from Rs.2.25 lakhs to Rs.2.40 lakhs for senior citizens; by Rs.10,000 from Rs.1.80 lakhs to Rs.1.90 lakhs for women tax payers; and by Rs.10,000 from Rs.1.50 lakhs to Rs.1.60 lakhs for all other categories of individual taxpayers. This means that a man who has a taxable income of less than Rs.13,333 per month or a woman who has a monthly taxable income less than 15, 833 or a senior citizen having a monthly taxable income of Rs.20,000 or less need not pay any tax.

The taxable income slabs are also raised. Now the taxable income beyond the exemption limit as mentioned above, up to Rs.5 lakhs will be taxed at 10% and 20% tax for taxable income between Rs.5 lakhs and Rs.8 lakhs and 30% tax for taxable income above Rs.8 lakhs.

When we talk about taxable income, it is arrived at after deducting the eligible deductions under various sections like Sec 10, 80C, 80D etc. In this regard, over and above the tax free savings limit of Rs.1 lakh under section 80c, additional tax free savings limit for Rs.20,000 towards investment in infrastructure bonds is proposed.

Cutting through the ice…

Though there is definite tax savings for all those who are paying taxes now, the analysis of various taxable income levels give varied picture regarding net cash outflow which is important in family budgeting. Be it a man or woman, you stand to have more cash in hand along with maximum tax savings only if your current annual taxable income is more than Rs.4,64,200. In case your annual taxable income is less than Rs.4,64,200, you will have more cash in hand only if you choose not to buy infrastructure bonds for additional tax savings. The tables given below shows the tax savings for different taxable income levels based on the budget proposals.

All figures in Rs. – For a Man

Current Taxable Income

180,000

300,000

464,200

600,000

900,000

Current Income Tax

3,090

15,450

49,275

87,550

180,250

Monthly TDS

258

1,288

4,106

7,296

15,021

Additional Savings towards Infra. Bonds

20,000

20,000

20,000

20,000

20,000

Income Tax based on 2010 Budget proposal

–

12,360

29,273

51,500

121,540

Monthly TDS + Addl Savings

1,667

2,697

4,106

5,958

11,795

Monthly TDS without addl savings

–

1,030

2,439

4,292

10,128

All figures in Rs. – For an Woman

Current Taxable Income

180,000

300,000

464,200

600,000

900,000

Current Income Tax

–

12,360

46,185

84,460

177,160

Monthly TDS

–

1,030

3,849

7,038

14,763

Additional Savings towards Infra. Bonds

–

20,000

20,000

20,000

20,000

Proposed Income Tax

–

9,270

26,183

48,410

118,450

Monthly TDS + Addl Savings

–

2,439

3,849

5,701

11,538

Monthly TDS without addl savings

–

773

2,182

4,034

9,871

We can find from the above tables that a person with a taxable income of Rs.3 lakhs stands to gain additional cash flow of Rs.258 only every month even if he avoid additional tax free savings in infrastructure bonds. At annual taxable income level of Rs.9 lakhs or more the maximum monthly additional cash flow would be Rs.4,900 which is very negligible compared to the inflation in the standard of living of those people.

If you consider the increase in petrol and diesel prices and the related increase in prices for all essential goods and services along with these, you will end up with less money in your pocket in the coming financial year than current year for same income levels. The personal income tax proposals though looked to benefit the common man at the hindsight, it is not giving any real benefits when we consider the price increase spiraled by other tax proposals. It is better to start tightening the belt than sit and relax thinking that you will have more money in hand. It was really a harsh budget!

By Sanjeev Kumar G, CFP

About the Author

Sanjeev Kumar G is the Head of Operations & Technology at JRG Securities Ltd. He is a Certified Financial Planner and was earlier the COO of the stock broking division and head of Research & Financial Planning departments at Bajaj Capital Ltd. Sanjeev has more than 18 years of experience in various fields of finance with experience in managing new projects, setting up new business units, strategic planning, designing operational processes, team building, managing multi functional teams and cost management. He can be contacted at [email protected]